Here’s a summary of six ways to avoid paying inheritance tax (IHT) unnecessarily. They’re legal (otherwise it’d be tax evasion) and commonly used. If you have any questions, just contact me for assistance.
1. Spouse and Civil Partner Transfers to Avoid Paying IHT
Gifts and transfers between most married couples and civil partners living in the UK are IHT-free.
If your partner’s not UK-domiciled however, limits can apply, and you should seek professional advice. I’m happy to help, any time.
By transferring everything on first death to the surviving partner you won’t entirely remove your estate’s vulnerability to IHT.
An IHT liability does occur when the second partner dies, however. So, it may be tax-effective to pass some of your estate to your children and grandchildren rather than simply transferring everything to the surviving spouse.
Also, if you know a couple that are getting married or entering into a civil partnership, you can give them a financial gift IHT-free, as a wedding present.
The amount you can give depends on your relationship to the recipient, though. You can give up to £1,000 per person, or £2,500 for a grandchild or £5,000 for a child. Check here for details.
2. Gifts or Bequests
Gifts or bequests to charities, universities, political parties and for a ‘national purpose’ or the ‘public benefit’ are IHT exempt. Be careful with the definitions, though, if you use this as a way to avoid paying IHT.
3. The £3,000 Annual Exemption
Everyone is allowed to make an IHT-free gift of up to £3,000 in any tax year – and this allowance can be carried forward one year if you don’t use up all your allowance.
This means you and your partner could give your children or grandchildren £6,000 this year, (or £12,000 if your previous year’s allowances weren’t used up), and you can legally avoid paying IHT.
You can continue to make gifts of this nature every year.
4. Small Gifts
You can make small gifts of up to £250 per year to anyone you like.
There is no limit to the number of recipients in one tax year, and these small gifts will also be IHT-free, provided you have made no other gifts to that person during the tax year.
5. The ‘Lifetime Gifts’ Exemption
Lifetime gifts are those made in your own lifetime. In other words, by you and while you’re still alive.
If such gifts are made to help with another person’s living costs, e.g. an elderly relative or child, then you can avoid paying IHT.
Other lifetime gifts may be exempt if you make them regularly (e.g., annually), and they come from your regular income without affecting your lifestyle.
Beware, however. Determining if such a gift is ‘exempt’ only happens after your death and is the responsibility of HMRC. I suggest if you’re making habitual gifts, it’s important to document your intentions and keep a record of this with your will.
6. Exemptions for Business Owners
If you’re a business owner, you may be able to avoid paying IHT in some cases, depending on the type of business you own.
Often, a transfer made during life or on death will be completely IHT-free. Find out more from HMRC, as there are quite a few details to be aware of. Or come and chat with me!
In conclusion, these are just 6 of the easiest and commonest ways you can use smart financial planning to avoid paying IHT. There are more, depending on your circumstances. I suggest that you’re better off talking to an expert about inheritance tax and should aim to do this as early as possible.
Don’t wait until someone has died to find out about IHT’s implications for your family.